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2017

Australian Dollar Research Report

Published: Monday 11 December 2017

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​​Sterling escapes some of the Brexit shadow

A game of two halves for the Australian Dollar

Guidance for AUD buyers and sellers

By David Johnson

Sterling escapes some of the Brexit shadow

Economic data for the UK has been positive for the most part this month. The manufacturing figures exceeding expectations and the construction sector picked up again slightly after a considerable knock the previous month. At the same time, the retail and service sector performances have been suffering at the hands of continued political uncertainty surrounding the Brexit negotiations and the fragility of the Conservative parties hold on power.

A decision that there will be no hard border with Ireland has finally allowed Brexit negotiations to progress, providing a welcome lift for the Pound and some positivity in what has been otherwise a cloud of concern. The next crucial steps include protecting expat rights and agreeing trade deals, so there is a great deal of work still to come…

A game of two halves for the Australian Dollar

The Australian Dollar, usually robust, has had mixed fortunes in recent weeks. The Reserve Bank of Australia (RBA) has kept interest rates the same for some time now, which has been weighing on the Australian currency, although it could be argued that this is deliberate to keep Australia’s export markets competitive. However, the most recent announcement from the RBA had a less dovish tone than previous statements, so markets responded positively and this, combined with Australian retail sales coming in stronger than forecast, helped strengthen the AUD.

While business confidence remains high, some data from Australia’s economy has failed to ignite the Aussie Dollar, namely poor economic growth (at the worst rate for 12 years). This though, was counterbalanced by the positive results elsewhere in the economy and the boost provided by China’s strong Purchasing Managers’ Indices (PMIs). China represents Australia’s major export relationship and economic performance in China is one of the key contributors to the health of the Aussie Dollar.

Guidance for Buyers

Compared to the last 18 months, it’s a very good time to consider buying Australian Dollars. The GBPAUD rate broke the downtrend in November and, since September, we have seen a 20 cent rally. After almost breaching the 1.80 level, this rate has slipped back a little at the time of writing. The resistance levels are the trendline at 1.80 and the Fibonacci retracement at 1.81. That marks the 50% retracement of the fall between May and October 2016. The momentum still points to higher levels but we are overdue a correction, so cannot be complacent. A correction back to 1.75 is very possible and 1.70 would mark a 50% retracement of this recent rally. We can’t rule that out.

Guidance for Sellers

It’s likely that with some progress in the Brexit talks, the Pound’s weakest days are behind it, so initially, you may wish to consider targeting 1.77 on an order; with the potential for further falls down towards 1.740 if a 1.750 uptrend fails to hold. Looking at the bigger picture, if Brexit negotiations grind to a halt again, the major downside target is 1.70. Use these levels as your outer parameters but shorter term requirements should be aimed within these lines.